Nearly three months after the mega-merger of HDFC Ltd and HDFC Bank came into effect on July 1, the shares of the merged entity, which now trade under HDFC Bank, seem to be feeling the side effects of the merger.
HDFC Bank's shares closed nearly 4% down today after it shared particulars of the merged entity in the analysts' meeting. It ended at Rs 1,566 (on NSE) today. India's largest private sector lender shared an update on the merged entity's financials and related matters for the first time today.?
HDFC Bank's shares are down nearly 9% since it began trading as a merged entity on July 1.
Due to accounting adjustments, the combined/merged entity's book value turns out to be lower than HDFC Bank's standalone book value and that has led to several brokerages cutting their targets on the stock, thus leading to rating downgrades.
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While Japanese financial giant Nomura downgraded the stock to a neutral rating with a reduced target price of Rs 1,800, Kotak Institutional Equities also cut its fair value target on the counter to Rs 1,850.
"HDFC Bank now trades at 2.5x 1-year forward BVPS (adjusting for subsidiaries), which is similar to ICICI Bank, despite a comparatively lower loan growth and RoA outlook. We cut our TP to Rs 1,800, valuing the bank at 2.5x Jun-25F BVPS (2.8x for ICICI), with subsidiaries contributing Rs 201 /share," Nomura said.
Here are the top four negative takeaways from HDFC Bank's analyst meeting which have worried the investors and left its shares bleeding today:
Asset quality ratios have deteriorated after the merger, with the GNPA ratio for the merged entity increasing to 1.4% from 1.2% for the standalone bank, while net NPAs will increase to 0.4% from 0.3%.
The NPA in the parent entity is higher than expected but further negative surprises should be negligible, Kotak Equities noted, as per ET report.
In Q1, the net interest margin or NIM was at 3.7-3.8% for the merged entity and 2.7% for HDFC. In its call, the bank's management highlighted that after adjusting for the excess liquidity carried by HDFC Ltd as of June end, the NIM profile (on a 2QFY24 opening basis) comes down even further to 2%. This 70 bps impact on HDFC Ltd¡¯s NIM profile translates to an impact of 25bp for the merged entity.
"We adjust our estimates to increase the liquidity on the merged entity¡¯s balance sheet in FY24F, with gradual tapering off in FY25-26F. As a result, we have cut our NIM estimates by 25bp for FY24F and 15-20bp in FY25-26F," Nomura reportedly said.
"This excess liquidity, along with the ICRR (incremental cash reserve ratio), will drag near-term NIMs... The impact will normalise in FY25 as liquidity gets deployed and ICRR ends this month," Jefferies said, as per a BQPrime report.
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HDFC net worth declined to Rs 1.12 trillion in July from Rs 1.34 trillion as of March due to accounting changes from IND-AS to IGAAP, credit policy harmonization, DTL reserve and other factors.
These adjustments together result in a negative impact of 4% on model FY24F BVPS estimates, Nomura said, adding the impact is higher at 6% of FY24F BVPS when we include the impact of interim dividend paid out by HDFC Ltd in Q1.
HDFC Bank's management highlighted that the cost-to-income for HDFC Limited under IGAAP accounting (on a pro forma basis) was at 19% in both 1QFY24F and FY23. This is much higher than the 10% cost-to-income ratio reported by it under IndAS previously.
"With HDFC Bank expected to report ~25bp weaker NIMs going ahead (hence deflating denominator), it is quite likely that this elevated cost-to-income profile is going to sustain going ahead as well," Nomura said.
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